Fed | E-piphany

Summary of My Post-CPI Tweets (Oct 2023)

November 14, 2023 Michael Ashton 3 comments

Below is a summary of my post-CPI tweets. You can follow me on X at @inflation_guy. Sign up for email updates to my occasional articles here. Individual and institutional investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!

Welcome to the #CPI #inflation walkup for November (October’s figure). This is the next-to-last month I will be doing this!
If you miss the live tweets, you can find a summary later at https://inflationguy.blog and I will podcast a summary at inflationguy.podbean.com . Those will continue in 2024 after the live tweeting stops.
Well, this report ought to be interesting. My forecasts are very different from the other forecasts out there. The Bloomberg consensus has +0.09% on SA headline, and 0.30% on core. The swap market, Kalshi, and Cleveland Fed are all in the same ballpark.

I have 0.14% NSA, roughly 0.22% on headline, and 0.38% on core.
It is a little wild to me that everyone else is so low, and it makes me concerned that I’m missing something. But I think it comes down to the fact that everyone must be expecting a big give-back on OER this month.
Used car prices should add this month. Health care insurance pivots from an 0.04% drag to an 0.02% add. Even airfares could rise, despite sliding jet fuel, because fares are too low given the level of fuel.
All of those are in my forecast (well, I conceded flat on airfares but it could go either way). I assume they’re in everyone’s forecast. So that leads me to believe that the assumption is a correction in OER is in store.
OK, I see the chart too. It sure LOOKS like OER did something weird last month. If OER prints 0.45% m/m instead of 0.55%, then that takes 2.5bps off my forecast. That still doesn’t get there. You need an 0.35% or something.

And oh by the way, I’d argue that the jump might just be payback for a too-rapid fall that happened earlier this year. There was no reason to expect monthlies to drop from 0.7% m/m in Feb to 0.48% in March. Rents are not collapsing and home prices are now going back up.
I know that’s inconvenient to the deflation story but it’s right on par with where my model says it should be. (Our model is Primary Rents but OER is based on rents).

So okay, I’ll drop my forecast 2.5bps on the assumption we go back to 0.45% m/m for OER. Now ya happy?!? But I’m not assuming any ‘payback’.

Meanwhile, I haven’t even talked about the fact that I have +1% on Used Cars, but that might be too conservative given how strong auctions were in the latter part of September (not picked up in the last number).
And I don’t have anything for New Cars – but thanks to the new wage agreement, car prices both New and Used are going to go up again.
I’ve already spoken plenty about the reversal in Health Insurance; it shouldn’t take anyone by surprise this year.
The change in method means that the shift from -0.04% to +0.02% per month should only last six months – it shortens the lag but this transition period increases the effect to synchronize.
With all this, Core CPI should stay at 4.1% y/y, or rise (if my forecast is on point). As I said last month, getting it below 4% is going to be more of a challenge. And Median inflation will fall to probably around 5.25% this month, but again we’re in the hard part now.
Breakevens have net slumped a bit this month, but that hides the fact that after last month’s CPI they spiked for a week or so. 10y breaks got to 2.50% in the bond market selloff before settling back.

If the bond bear market continues (and the balance of large government budget deficits, smaller trade deficits, and a Fed in run-off means more pressure on rates to attract domestic savers), breakevens will go back up.
Not sure that’s a good play in Q4, since this tends to be a good seasonal time for bonds, but a bad CPI could change that. And, naturally, with a recession coming (we think?) it’ll be harder to get higher rates immediately.
However…the secular bull market in bonds is over so the real question is whether interest rates are aimless for a decade, or in a secular bear market. Too long a topic for a tweet storm!
So that’s it for the walkup. Pretty simple task today: 1. check OER, 2. check core ex-housing, 3. check core services ex-housing (“supercore” for a finer read on the Fed (?))
Keep checking the improving distribution of inflation – core below median means the tails are moving to the downside, in a disinflationary signature, but not sure that will outlast 2024.
Good luck!

Very soft number! Let’s see how much of this is ‘payback.’
If it’s CPI day there must be I.T. issues. It’s a law. Headline was +0.045%, Core +0.227%. Used cars was a DRAG, which is completely at odds with surveys. OER dropped to 0.41% m/m, but that by itself wouldn’t be enough for the downside surprise.
Airfares fell, Lodging away from home fell significantly, New Cars was a marginal decline…and health insurance didn’t add as much as it was supposed to (not sure why) although it was positive. Looks like a well-rounded soft number.
Here is m/m OER. Back to prior level, but no payback.

In the big picture, the 3-month average isn’t all that soothing, especially when we look at Used Cars and other quirks that will likely be repaid.

So Black Book was -1.85% in September, NSA CPI Used Cars was -5.63%. BB was +1.07% in October, NSA CPI Used Cars was -1.40%. Private auctions were strong. This is confounding – might be a seasonal quirk that BLS reflects different seasonals, but the NSA pretty far off.
m/m CPI: 0.0449% m/m Core CPI: 0.227%
Last 12 core CPI figures

M/M, Y/Y, and prior Y/Y for 8 major subgroups

Primary Rents: 7.18% y/y OER: 6.85% y/y

Further: Primary Rents 0.5% M/M, 7.18% Y/Y (7.41% last) OER 0.41% M/M, 6.85% Y/Y (7.08% last) Lodging Away From Home -2.5% M/M, 1.2% Y/Y (7.3% last)
Some ‘COVID’ Categories: Airfares -0.91% M/M (0.28% Last) Lodging Away from Home -2.45% M/M (3.65% Last) Used Cars/Trucks -0.8% M/M (-2.53% Last) New Cars/Trucks -0.09% M/M (0.3% Last)
Here is my early and automated guess at Median CPI for this month: 0.359%

Now, this is really the important thing. Median is still 0.36%. That tells you this is left-tail stuff more than the rents stuff.
Piece 1: Food & Energy: 0.17% y/y

Food at Home was +0.26% SA; Food Away from Home +0.37%. Food added 0.04% to headline, which was right on my forecast. Look, talk to any restaurateur – wages are still a big problem. Food AFH isn’t going to deflate soon.
Energy was -0.22% m/m NSA; I’d estimated -0.17% so it was very slightly more drag.
Piece 2: Core Commodities: 0.0948% y/y

Piece 3: Core Services less Rent of Shelter: 3.71% y/y

Piece 4: Rent of Shelter: 6.76% y/y

Core Goods: 0.0948% y/y Core Services: 5.5% y/y

Core goods actually ticked up slightly. Despite the decline in Used and New cars.
This is part of the core goods story – continued acceleration in Medicinal Drugs. Honestly this is something we’ve been expecting for a long time and just surprised how long it has taken. Many of the APIs for pharma come from China.

Core ex-housing actually ticked up very slightly from 1.97% y/y to 2.05% y/y. That sounds great but prior to COVID it hadn’t been above 2% since 2012 so that’s still too high.
Largest declines (annualized m/m) in core were Lodging Away From Home (which is quite surprising) at -26% and Car and Truck Rental (also surprising) at -17%. Both core services but only the latter is “supercore”.
Largest advances Motor Vehicle Insurance +26%, Tobacco +25%, Jewelry and Watches +16%.
I am probably not going to be exactly right on median because in my calculation the median category is Northeast Urban OER, which means we’re relying on my ad-hoc seasonal adjustment. Could be as low as 0.32% m/m, or a smidge higher. Either way, it’s not price stability.
I guess on Health Insurance I’ll have to leave the explanation to someone with a pointier pencil. My calculations had the effect being about 2bps/month; this month is was about 0.8bps. I would call that negligible except that previously it had been a 4bps drag.
Our housing model, updated with the latest data. Kinda right on par. But notice our model never gets anywhere close to deflation in housing. Those calling for such are going to be disappointed.

This is a strange dichotomy and I wonder if some physician can explain it. Maybe doctors are making their money by channeling expensive services through hospitals. But it’s weird to see hospital inflation so buoyant while doctors’ services are deflating.

Education and Communication was a little soft. Some of that was a curious (to me) -0.24% NSA m/m decline in College tuition and fees. Probably a quirk. Also Telephone hardware was -1.9% m/m.
Apparel was soft – partly this is expected because of the lagged strength of the dollar on core goods, but the -5.1% decline in Women’s outerwear seems unusual.
The EI Inflation Diffusion Index is back almost to flat. Note that doesn’t mean 0 inflation. To get back to persistently having Median CPI around 2-3%, you’d want to see the diffusion index quite a bit negative. I think that’s going to be difficult.

Last chart, and it tells the story. Left tail is growing, but rest of the distribution is moving left only reluctantly. The big fingers on the right are housing. It’s encouraging that there is more diversity here – a sign that the money impulse that affects everything is waning.

Here is today’s summary. Core was surprisingly tame but it was largely from some quirky one-offs. Median didn’t improve very much. Neither Core nor Median over the last 3 months is where the Fed wants it. This doesn’t change, therefore, the higher-for-longer meme.
It also doesn’t demand further tightening, but that’s not news. We already knew the Fed was done.
Looking ahead, there will be further slow progress on housing, although as I keep saying – not as much as some forecasters think. The problem is that outside of housing, core inflation doesn’t look like it wants to fall much further.
Naturally all of this depends on what the Fed does going forward. If the money supply keeps bumping along around zero growth, then eventually the velocity rebound will run its course and inflation will go back to 2-3%.
But higher rates mean that velocity is probably going to do more than just rebound, so higher for longer will need to be longer than people expect – or, possibly, than the Fed can maintain in the face of recession.
That’s the hard part. This so far has been the easy part. If market rates rise again in sloppy fashion after the new year, despite recession signs…what does the Fed do? Inflation won’t be at target yet, or even close. Stay tuned!
…and thanks for staying tuned. Have a good day.

The CPI was a happy surprise today, but not so much that I would throw a party. The low miss was partly caused by inexplicable declines in autos and lodging away from home, while the correction in rents basically just went back to the prior level rather than stepping down to a slower pace. Rents are still going to come down, and in some places in the country they are falling – but in some places they are still rising briskly.

That dispersion in experienced rental inflation is actually part of the good news, and it’s good news that we see throughout the CPI over the last several months. It’s the good news that the Enduring Investments Inflation Diffusion Index is capturing: all prices are not moving as one, as they mostly did during the upswing in inflation. A high correlation between unrelated categories tends to suggest a common impulse is causing the movement – and is yet another reason that the notion that inflation was coming from various idiosyncratic supply chain issues should never have been entertained. There was clearly a large impulse acting on all prices: the 20%+ spike in money growth. Now that the money supply is flat, though velocity is rebounding, price dispersion is reasserting.

(Spoiler alert: it isn’t yet happening on the inter-country experience – all countries saw their inflation move in synchrony when it went up, and all are seeing it move in synchrony coming down, so it’s early to say the battle is won.)

We’re still just starting the difficult part, from the standpoint of monetary policy but also from the standpoint of figuring out how quickly inflation can get tamped back down to target. And the dispersion makes that more difficult, because the signal gets lost in the noise – just as it used to, before the money gusher. Next month we’ll have to deal with likely rebounds in Lodging Away from Home as well as increases in autos, reversing this month’s surprises, but we’ll probably get slightly better rent numbers.

What I can say is that the market reaction to all of this is absurd. This just doesn’t move the needle on the Fed. There was no tightening and no easing in the pipeline before this number, and after this number that hasn’t changed an iota. But at this hour stocks are +2% and bonds are soaring. I know the conventional wisdom is that rates are going back to zero…it just seems kind of early to get on that train when median inflation is still 5.3%…

Categories: CPI, Tweet Summary Tags: core cpi, core inflation, CPI, Fed, inflation, interest rates

Money Velocity Update!

November 2, 2023 Michael Ashton 3 comments

Now that we have our first estimate of GDP for Q3, we also have our first estimate of M2 velocity for the third quarter. Because there is an amazing amount of uninformed hypothesis out there, I figured it was worth a quick review of where we are and where we’re going, and why it matters.

Why it matters: without the rebound in velocity, the slow-but-steady decline in M2 that we have experienced since mid-2022 would be outright deflationary. The money decline and the velocity re-acceleration are part and parcel of the same event, and that is the geyser of money that was squirted into the economy during COVID. Velocity collapsed for mostly mechanical reasons: it is a plug number in MVºPQ, and since prices do not instantly adjust to the new money supply float, velocity must decline to balance the equation. Another way of looking at it is that if you add money to people’s accounts faster than they can spend it then velocity will decline. I have previously presented an analogy that in this unique circumstance money velocity behaves as if it were a spring connecting a car, speeding away suddenly, with a trailer that has some inertia. Initially the spring absorbs the potential energy, and later provides it to the trailer as it catches up. Ultimately, the spring returns to its original length, when the car has stopped accelerating and the trailer is going at the same speed.

As M2 has declined in an unprecedented way, after surging in an unprecedented way, velocity has rebounded in an unprecedented way after plunging in an unprecedented way. All of these things are connected, episodically (but we will look at the underlying, lasting dynamics in a bit). With this latest GDP update, M2 velocity rose 1.9%, the 9^th largest quarterly jump since 1970. Over the last four quarters, it has risen 10.4%, the largest on record, and 16% over eight quarters, also the largest on record.

https://fred.stlouisfed.org/series/M2V

To return to the level M2 Velocity was at, at the end of 2020Q1, it needs to rise another 4.8%. For M2 to return to the level it was at, at the end of 2020Q1, it needs to fall another 23%. One of these is likely to happen; the other one is not. The net difference, after subtracting cumulative growth (8.8% since then, so far), is a permanent increase in the price level. If M2 continues to come down, the net effect is a higher level of inflation over this period but not calamitous.

Note that there is no way we get the price level back to where it was, unless M2 declines considerably farther for considerably longer, or unless money velocity inexplicably turns around and dives again. I know that some well-known bond bull portfolio managers have been calling for that, but they were wrong the whole way along so why would you listen to them now?

I’ve been pretty clear that (a) I have been surprised that the Fed was successful in decreasing the money supply, since I thought the elasticity of loan supply would be more than the elasticity of loan demand (I was wrong), (b) I think the Fed deserves credit for shrinking the balance sheet, which they have long said doesn’t matter (it matters far more than interest rates, for inflation), (c) Powell deserves credit for turning into a hawk and pushing the institution of the Federal Reserve to become hawkish after decades under Greenspan, Bernanke, and Yellen where the only question being asked was ‘do we wait for the stock market to drop 10%, or only 5%, before we flood the system with money?’ Chairman Powell deservedly will go down in history as the guy who recognized the ‘spring effect’ that kept long-term upward pressure on inflation even as so many people were chirping about supply constraints and ‘transitory inflation’ (including, to be fair, Powell himself. But whatever he said, what he did was pretty reasonable).

However, the next bit is going to be challenging.

Velocity, being the inverse of the demand for real cash balances, is primarily affected by two main forces – one of them durable and one of them ephemeral. The ephemeral effect, which is rarely super-important, is that people tend to want to hold more cash when they are uncertain. Indeed, our model for velocity actually captured accidentally some of the ‘spring effect’ because for us it showed up as extreme uncertainty. Put another way, even if the Fed hadn’t flushed tons of money into the system, velocity would have had something of a sharp decline because of the high degree of economic uncertainty. Ergo, it was crucial that they flush in at least some money because otherwise we would have had outright deflation. They didn’t get the magnitude right, but they got the sign right. Anyway, the ‘uncertainty’ effect doesn’t last forever. The measure of uncertainty I use is a news-based index of economic policy uncertainty; it has retraced about 85% of its spike although it has been persistently high since political divisiveness became the main fact of US political life back in 2009 or so.

The more durable effect on the desire to hold cash is the presence of better-yielding alternatives to cash. When interest rates are uniformly zero and the stock market is on the moon, there’s very little reason to not hold cash. But when non-cash rates are high, and stocks and other investments more reasonably priced, cash is a wasting asset that people want to ‘put to work.’ The easiest way to see that is with interest rates, which for the last couple of decades have tracked the decline in money velocity closely as both declined.

And here is the problem. If interest rates are back at 2007 levels, then naïvely we would expect velocity to be back in the vicinity of 2007 levels also. But that is massively higher than the current level. In 2007, money velocity was around 1.98 or so: about 49% higher than the current level!

Needless to say, there’s no way the money supply is contracting that much. If velocity rose even, say, 30% then we would have a serious and long-lasting inflation problem. Fortunately, because of the economic policy uncertainty and other non-interest rate effects (I did say that “naïvely” we would be looking for 1.98, right?), the eventual rise in velocity beyond the snap-back level is much less than that. It actually only adds about 6% to the snap-back level. That still means 2% more inflation than would otherwise be expected, for three years, or 3% more for two years.

Of course, interest rates could fall again and ‘fix’ that problem. But it’s hard to see that happening while the money supply continues to contract, isn’t it? And that’s where it gets difficult. If you continue to decrease the balance sheet – which you need to do – and money continues to contract, then you probably get more velocity and inflation stays higher than you expect. Or, if you drop interest rates then you don’t get velocity much over the pre-COVID level, but you also get more money growth and inflation stays higher than you expect.

All of which adds up to one reason why I continue to think that inflation will stay sticky and higher than we want it, for a while. Powell has surprised me before, though, and this would be a good time to do it again.

Categories: Causes of Inflation, Federal Reserve, Monetarism Tags: core inflation, CPI, Fed

Summary of My Post-CPI Tweets (September 2023)

October 12, 2023 Michael Ashton Leave a comment

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy. Sign up for email updates to my occasional articles here. Individual and institutional investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!

Welcome to the #CPI #inflation walkup for October (September’s figure).
At 8:30ET, when the data drops, I will pull down the data and then run a bunch of charts. Then I’ll comment and post some more charts. As usual. But nearing the end of this string. December is the last month I’ll do this live.
Later, I will post a summary of these tweets at https://inflationguy.blog and then podcast a summary at inflationguy.podbean.com . Those will continue after the live tweeting stops in 2024!
The estimates for this month’s CPI data are fairly uniform across sources in expecting 0.26% m/m core, and 0.31% or so on seasonally-adjusted headline. My forecasts are a bit higher on Core, but in-line on headline. Here’s why.

First of all, while used car prices declined this month they fell by less than the seasonal adjustment factor would suggest. Instead of -1.9%, which is the non-seasonally-adjusted pace that Kalshi shows for its used car CPI market, I see +1.3% for the SA pace.
However, there’s a huge amount of variance there so I am actually penciling in flat. Partly, that’s also because used car prices haven’t yet fallen as much in the CPI as the Black Book survey would project, so maybe I’m too high.
Used car auctions in the latter half of this month were very strong, though, thanks to the strike against US auto makers. That hasn’t yet affected sales, but the auctions show it SHOULD affect prices since there is less reason to clear the lot if there are no more cars coming.
But although used car auctions have been strong, I don’t expect CPI to LEAD the Black Book survey. CPI almost never leads.
So if new car CPI isn’t strong this month, I expect it to be strong next month. Ditto with used cars. In fact, “if not this month, next month” will be a constant theme here.
Same is true of airfares, which last month rose about 5% but still lag far behind jet fuel – which has continued to rise. I expect another add there. And Lodging Away from Home was a surprise decline last month, which I am expecting to reverse this month.

Now, this month we do still have the 4bps drag from health insurance…but that reverses next month. Enjoy it while you can.
We are coming to the end of several of these trends that have flattered the CPI (or flattened it) recently: health insurance & the drag from used cars being the big ones. Used cars still has downward pressure from rates, but the strike is more important.
Thus, while y/y core CPI should get down to 4.1% or 4.2% this month (due also to easy comps vs 2022), getting it BELOW 4% is going to be tougher.
One trend that will be continuing for a while is the slow (accent on slow) deceleration in shelter inflation. Last month, OER was +0.38% and Primary Rents +0.48% m/m. That was right on my model. This month I have Primary Rents at +0.40% m/m, and the combination at +0.38% m/m.
Obviously the rent thing will continue for a while, but it won’t slow down as fast as people expect. I think that must be the reason that the consensus forecasts are soft given the obvious adds this month. So we will see.
Interestingly, the consensus on headline is roughly where MY headline estimate is despite my higher core. That means economists see food and energy adding more than I do. I don’t see that. Gasoline was basically flat Sept/Aug. I have 1bp from energy and 1bp from food.
Of course, with war in the Middle East – though weirdly, energy markets have been incredibly insouciant here – there is much more upside potential to energy prices going forward. And not much downside, unless growth collapses.
And while there are plenty of people looking for a growth collapse…I don’t see that. A recession, definitely, but a deep one? One that damages the financial infrastructure? Not really. Might be long, but not deep. And with inflation as well.
From a markets perspective, it has been a weird month in inflation. Real rates have shot up MORE than nominals, which is something you’d expect at the start of an expansion, not with recession coming on.

Breakevens are DOWN even though overall rates are UP, in other words. It’s bizarre;as I said in my podcast last week TIPS are finally an absolute buy, not just a relative buy compared to very-expensive nominals. https://inflationguy.podbean.com/e/ep-84-is-it-time-to-buy-tips/
Incidentally, also take a look at the nice Q&A that Praxis did with me this week. https://lnkd.in/emCrcnHs
And while I’m thinking about it, take a look at the new Enduring website: https://www.enduringinvestments.com
I said last month: “I think markets recognize that the narrative is turning, from “we are in an inflationary spiral” to “inflation is coming down” to “okay now it gets harder.” And that leaves breakevens a bit aimless for now.”
Still true…but we are further into that turning. It gets more difficult now. The Fed’s job is also getting more difficult, but we’ll wait to see what this number is before talking too much about that.
That’s all for the (short) walkup. Good luck today!

We are at 0.323% on Core, and 0.396% headline, so higher than expectations. BLS made some more changes in the way they roll out the release, so I’m about 1 minute behind schedule.
I can already see Used cars was a drag but rents a big gain as OER rebounded from last month and Lodging Away from Home bounced (as expected).
m/m CPI: 0.396% m/m Core CPI: 0.323%
Last 12 core CPI figures

OK, so looking at this…it’s a bad number but a lot of this is probably going to trade to OER. Still, June and July start to look like the aberrations they were.
M/M, Y/Y, and prior Y/Y for 8 major subgroups

Nothing really stands out here…Housing obviously strong.
Core Goods: 0.0221% y/y Core Services: 5.69% y/y

The overall trends in core goods and services are positive. Core goods going negative y/y is lower than I think is sustainable, and it should start to turn. Although with the dollar as strong as it is, it’ll take longer than I had been expecting.
Primary Rents: 7.41% y/y OER: 7.08% y/y

So you can see no big change on the y/y trends. They’re slowing, but (as I’ve said) they’re not slowing as fast as everyone seems to think they will. OER’s jump this month will get the press, but overall the trend is in line.
Further: Primary Rents 0.49% M/M, 7.41% Y/Y (7.76% last) OER 0.56% M/M, 7.08% Y/Y (7.32% last) Lodging Away From Home 3.7% M/M, 7.3% Y/Y (3% last)
However, the m/m on primary rents also are higher than my model. Remember, costs for landlords are continuing to rise – it’s hard to imagine that rents will actually decline and landlords will just accept losses. There’s new supply, but way more new demand from immigration.
Some ‘COVID’ Categories: Airfares 0.28% M/M (4.89% Last) Lodging Away from Home 3.65% M/M (-2.97% Last) Used Cars/Trucks -2.53% M/M (-1.23% Last) New Cars/Trucks 0.3% M/M (0.27% Last)
The rise in airfares is still lower than it should be and I will expect a further increase next month. Lodging Away from Home was an expected bounce, and on par. The decline in Used cars is probably at least temporarily over thanks to the strikes – we will see it next month.
Here is my early and automated guess at Median CPI for this month: 0.439%

The caveat to my median estimate is that the median category is a regional OER, which I have to guess at seasonal adjustment for. But this is the highest median since February. Again, July was an obvious outlier and now it’s more obvious.
Piece 1: Food & Energy: 1.96% y/y

No surprise there’s a bounce in food and energy y/y this month.
Piece 2: Core Commodities: 0.0221% y/y

Piece 3: Core Services less Rent of Shelter: 3.56% y/y

This includes Health Insurance…and that will reverse next month. Instead of dragging 4bps/month on core, and 10-12 on this subgroup, it’ll be adding back 2bps/month on core.
Piece 4: Rent of Shelter: 7.2% y/y

In the good-news category, Core ex-housing is down to 1.97% y/y. So, if you ignore housing, the Fed is at target. Except that’s largely thanks to Used Cars and Health Insurance decelerations, both of which are tapped out. As I said, it gets harder from here.
Core Categories with the largest m/m declines (annualized): Jewelry/Watches (-27%), Used cars & Trucks (-26%), Women’s/Girls Apparel (-20%), Infants’ Toddlers’ Apparel (-18%), Motor Vehicle Parts & Equipment (-16%). This last one also is probably going to reverse due to strikes.
Biggest annualized monthly gainers: Lodging AFH (+54%), Misc Personal Goods (+22%), Motor Vehicle Insurance (+17%), Misc Personal Services (+14%), Tenants/Household Insurance (+11%), Alcoholic Beverages (+10%).
Further to that, Misc Personal Services was +1.1% m/m and Misc Personal Goods was +1.7%. Those only sum to one percent of the whole CPI so not a big deal. A big reason that the “Other” subindex was +0.57% m/m though.
I have to confess a little surprise that yields and BEI aren’t up more on this. Yes, some will say it’s “just OER” and that looks like something of a makeup number…but at the VERY LEAST it should make the disinflationists question that KEY PART of their theory.
Maybe…just maybe…rents aren’t going to collapse into deflation? I dunno, just spitballing here, but since there’s no sign of it, and home prices are rising again…a number like this ought to at least make you think about the possibility.
OK, the response after the initial drop-and-bounce looks like people are having a think. I should say that I don’t think this changes the Fed’s trajectory – they’re done, although this brings in the chance for one more 0.25% to appease the hawks.
But clearly, 500bps of rate hikes hasn’t done the trick so what will 25 or 50 more do? Or 200? All that will do is slow the economy, without hurting inflation. There is little to no evidence that rate hikes push inflation lower, and at this point even the hawks must be noticing.
Running some diffusion stuff now. The story there continues to be positive. But we always knew the spike wouldn’t last forever – the question now is, where does inflation fall to? And so far, there’s no sign we’re going to plunge back to 2%. The hard part has started.

Another diffusion chart. Slightly worse this month (this is based on y/y), but overall improving. However, again…if 55% of the CPI, or 30% + OER, are still inflating faster than 4%…you’re not back to target yet. Far from it.

That’s enough for today. The summary is that the big surprise was rents, but outside of rents the news wasn’t so wonderful that we can ignore the fact that rents are not decelerating as fast as people expected. I continue to expect core of high 3s, low 4s for 2023. On track.
Thanks for tuning in. Be safe out there!

I started out with the theme “if not this month, then next month,” but we can dispense with that theme. Although that can be said of Used Cars, and Airfares – both which were lower than I expected – the more accurate theme is the one I started teasing last month: “now it gets harder.”

The lion’s share of the deceleration in core goods is over with. While the dollar’s continued strength will remain a pressure on goods prices, we’re down to zero in a category that even before COVID was only deflating 1-2% per year. And in the post-COVID, de-globalizing world, we are unlikely to see core goods prices sustainably deflating.

The decline in health insurance CPI is over with. Over the last year, that declined almost 4% per month and dragged 4bps per month on core CPI. In the coming 6 months, that is going to be an add of something like 2bps per month. You were sailing with that wind but now the wind is in your face.

Energy prices, a continued drag since the Biden Administration started flushing the SPR, are no longer going to drag. Whether or not gasoline prices rise back to the level they were prior to the SPR releases, they’re not going to be headed much lower especially with war in the Middle East. While the market seems amazingly insouciant about the widening of that war – “hey, neither Israel nor Gaza produce much oil so we good” – this does not feel like prior Israeli-Palestinian conflicts to me. Recent oil inventory numbers have been volatile and confusing, but unless the US recession is sharper or deeper than I (or OPEC) expect the cartel is likely to be able to keep prices high especially in an era when the US is not producing with heartfelt enthusiasm.

Further decelerations in rent are still ahead. But none of my models have primary rents slowing to below 3%, and that’s in contrast to what seems to be a general consensus that rents will outright decline nationally. I don’t see it.

The decline in rents is a big part of why core is down to the low 4%s, and will drop further over the next year even with other things no longer dragging. But again, this is no longer about when the peak in inflation will get here – it’s about where inflation is going to decline to. From 6.6% to 4.1% was the easy part. From 4.1% to 3% is going to be difficult. From 3% to 2%? So far, I don’t see anything that gets us there.

Categories: CPI, Tweet Summary Tags: core cpi, core inflation, CPI, Fed

Summary of My Post-CPI Tweets (July 2023)

August 10, 2023 Michael Ashton 2 comments

Welcome to the #CPI #inflation walkup for August (July’s figure).
At 8:30ET, when the data drops, I will run a bunch of charts. Because Twitter has made auto-posting them difficult /impossible, I’ll post those charts manually with commentary as I go. Then I’ll run some other charts.
Later, I will post a summary of these tweets at https://inflationguy.blog and then podcast a summary at https://inflationguy.podbean.com. Thanks again for subscribing!
Get ready: today will be a low number, and good news. But it’s about as good as the news is going to get. Y/y core will decline again next month, but the monthlies won’t keep improving.

This month, the forecasts get a large drag from Used Cars. And in fact, Used Cars creates downside risk to these numbers – it has surprised significantly on the high side for multiple months. If there’s payback, it could be a LARGE miss.
The y/y figures for used cars have been in line with y/y figures from Black Book, so it’s possible that the recent misses have just been because of some odd seasonal quirk.
If so, then no payback is necessary and we’ll get something like -2.5% (my forecast), plus or minus a couple of tenths. (That’s somewhat joking since this series is very volatile).
I actually wrote a column (on the blog) about the volatility of these various series. While everyone thinks inflation is going to drop swiftly back to earth, the volatility of the numbers hasn’t done so. And that’s a tell.
This is rolling 12-month volatility on used car CPI. The picture looks similar for lots of subcategories.

The basic idea is that if everything was returning to normal in terms of the trend inflation level and the placid behavior of it…then we’d also see the VOLATILITY of inflation plunging back to normal. Not yet.
Looking back at those forecasts, I should point out that I’m again (and annoyingly) right about where the consensus of economists is. Kalshi is lower, though it has been trending higher. Again, I do think there is downside risk to this figure.
OER and Primary rents I have penciled in at +0.43%, sequentially slower from +0.45% last month. There is further slowdown coming, but we aren’t going to zero as NTRR and other models are predicting.
I really like our new model, which is not just functionally a lag of property prices (which drives most models) or a straight lag of less-accurate (but current) rent figures. I write about the model in this quarter’s Quarterly Inflation Outlook (due out Monday).

Because a lot of the drag this month is going to be from Used Cars, and we collectively feel pretty confident about that, it’s going to be critical to look at Median. Last month it was 0.36%, and the last several have been much better than those from the prior year.
So again, all of this is good news. But we are using up a lot of the good news, and while everyone will extrapolate today’s CPI if it’s good news be careful about that.
This month will also gets flattered on the headline from declines in piped gas, and the rise in gasoline won’t hit until next month. Oh, and gas is rebounding too.
In the big picture, ‘supercore’ (core services less rents) is still the main category of interest, knowing though that it’s dampened by Health Insurance.
Along those lines…the large rise in UPS compensation is emblematic of the new muscle of labor and a reminder that the wage-supercore feedback loop is still operating.
Again, don’t get too excited by today’s good news! The big picture is: money stock contacting, but money velocity recovering (fastest 3q rise ever). Core goods down and dollar strong.
But government deficits are rising again, partly because interest costs are skyrocketing. This federal dissaving isn’t seeing offsetting domestic (or international) saving. So expect more pressure on interest rates. And it sets up a future dilemma for the Fed.
We aren’t out of the woods yet. I think inflation is going to ebb to the high 3s/low 4s on median CPI, but then get pretty sticky. And the next upthrust in inflation will start from a much higher level than before.
But that’s all far away. In the meantime, inflation markets have been relatively calm with breakevens up a little bit over the last month and real yields hovering just below 2%.

It would be a great place to have the market find balance, around long-term fair value on real yields. But…inflation volatility suggests it’s far too early to declare victory on inflation for all time.
Good luck out there!

OK, 0.167% on core. Numbers still coming in, waiting to see how much was Used Cars. Rents were behaved.
Sorry, that was 0.160% on core. 0.167% was SA headline.
Used cars was -1.34% m/m, so about half of what I expected and the general consensus. So what dragged?
Charts will follow in a few. OER was +0.49%, a bit higher than I expected; Primary rents +0.42%. Lodging Away from Home -0.34%.
Wow, another huge drop from airfares. Remember last month’s -8.11% drop was almost unprecedented? Well, we got a second month of the same. That seems implausible. Not sure what’s happening there!
Core goods, thanks to Used Cars mainly, dropped to +0.80% y/y. Core services is still high, but fell from +6.2% to +6.1% y/y.
The diffusion things will look interesting. Of the 8 major subcategories, Housing was +0.35% m/m but no other category was higher than +0.23% m/m (and that was food). Next highest was recreation at +0.12%.
Not my normal first chart but here is y/y CPI for pharma. It was +0.58% m/m.

OK folks – here’s m/m core CPI. As I said, don’t get used to this low level. But it sure LOOKS like we’ve gone back exactly to 2% and stuck the landing!

Here are the 8 major subgroups I mentioned. Very tame m/m.

Now THIS is the big chart. This is Median CPI. I want to look at the subcomponents – Other Food at Home was the median category. This is the best news in the report.

Here is the rent chart. Our model has them going to ~3% over the next year. Unless core goods keeps dropping (which means the dollar continues to rally) it’ll be hard to get inflation back to 2% if housing is at 3%. Only reason it happened before was core goods deflation.

To that point, core goods needs to go negative if you want to get back to 2%. And I think even then it’s difficult unless wages crash back down. No sign of that at the moment.

Four pieces. The interesting bit is that core services ex-rents actually rose slightly y/y.

More on Median. It clocks in at +0.19%. Amazingly, that’s despite all of the OER subcomponents being higher than that. Usually to get a low number you need at least one of the big-weight pieces to be there.
But in this case, we had Recreation, Medical Care Services, New Vehicles, Housing Furnishings and Operations, all 4% or higher weights and all less than 1.5% annualized m/m.
That starts to look a little quirky. If even one of the 1% categories had been higher then the median category would have been Fresh Fruits and Vegetables and the m/m would have been 0.29%. Still low but not the number we will see.
I’ll have the diffusion charts in a minute and those are interesting. So, low core and median – you’d think a lot of really low categories right? But only ones below -10% annualized were Public Transportation (-54%, flag that!), Used Cars/Trucks (-15%), and Misc Pers Goods (-11%)
On the high side we had Motor Vehicle Maint/Repair (+13%), Infants’/Toddlers’ Apparel (+17%), Motor Vehicle Insurance (+27%), plus a couple of non-core categories.
But there were a LOT between -10% and +1.4% annualized.
Core ex-shelter fell to 2.62% from 2.80%. It was lower in early 2021 but this is improvement obviously.
as I said the airfares piece is really odd. Never have had 2 back to back months like that EXCEPT at start of pandemic and that was with jet fuel prices plunging. They’re not. This is…hard to believe. It’s a one-off last month I said we could be sure we wouldn’t get again! [First chart is m/m, second is y/y.]

You really can go either way on this number. Here is the Enduring Investments Inflation Diffusion Index. The disinflation is continuing, and that’s good news. OTOH, we have some really crazy outliers like airfares.

Here’s where CPI Airfare sits relative to jet fuel (seasonally adjusted). We are likely to see a catch-up in this next month. I am really curious which routes are getting lots cheaper. I haven’t seen it.

Now, maybe airfares is a micro effect here that indicates a softening in travel and an early warning of decreased consumer spending. Maybe it’s a bullwhip – after “revenge travel” everyone is going back to normal travel demand. Still, betcha we don’t get another -8% next month.
OK last chart. This is y/y but it looks similar m/m. The high bars on the right are shelter and they’re moving left. Few huge outliers on the right. Then lots of little categories strung out between 3 and 7%. Then about 22% less than 2% including 17% in outright deflation.

The outright deflation ones are mostly core goods, and they’re not generally going to stay there. So what we are going to see over next year is all of these things starting to trend back towards the middle. Where’s the middle? I think it’s high 3s, low 4s. But that’s the question.
Bottom line here. Overall number pretty close to expectations. There is nothing here that would argue that the Fed ought to keep raising rates – inflation is drifting lower, and nothing they can do will speed that up.
Indeed, nothing the Fed has done so far has caused this, except inasmuch as higher rates helps the dollar which helps core goods to decline. Now…the Fed also oughtn’t ease any time soon. There’s no sign of deflation here or even stable sub-2% inflation.
Ergo, I think we are going to see the Fed basically go to sleep here for a while, unless the bond market starts to get sloppy because of the huge demand from Treasury. If the Fed needs to intervene and buy bonds…that will be a very bad sign. But not going to happen today!
Thanks for tuning in.

We knew going in that this would be a soft number, and that it also would likely be the softest in a while. We didn’t get as much of a drag from used cars as we expected, but we got some; the real culprit was the large drag from airfares. It’s hard to understand that one, but especially with jet fuel prices back on the rise we are going to get a give-back from that next month in all likelihood. Indeed, the August CPI is shaping up to be sobering. Core should be above 0.3% m/m again, and headline is currently tracking at 0.65% or so on a seasonally-adjusted basis. So store the party hats for now.

That said, it was encouraging to see so many categories with small changes on the month. There were enough changes that median inflation is going to print very low, 0.19% or so, this month. If that were to recur it would be a great sign. Alas, it’s very unlikely that we will see another median like that very soon. As it was, it was almost an 0.29% as the next category above the median one was that much stronger.

From a market perspective, this is positive. That’s partly because “the market” tends not to look ahead very much (yeah, I know you learned something different in school but “the market,” especially in a day dominated by mechanical trading based on parsing the news headlines, does not discount the future very well any more. That’s one reason why we keep having periodic mini crashes when reality abruptly intrudes). This inflation number gives no real reason for the Fed to hike rates again. As it was, the argument for another 25bps after 500bps have been done was always very weak, especially since there is no real evidence that interest rate hikes do very much to inflation. At some point, the beatings get to be gratuitous and sadistic.

The problem is that there is going to be pressure on longer-term interest rates given what’s happening with the budget. I’m watching that carefully. As I write this, 10-year interest rates are back above 4%. With data like this, that doesn’t make a lot of sense. But there’s a lot of paper out there and it may need higher rates to find its “forever home.”

So, enjoy this print. It’s legitimately positive news. Only the folks looking ahead to next month ought to be less cheerful but in the meantime eat, drink, be merry, and buy stonks.*

* This is tongue-in-cheek naturally.

Categories: CPI, Tweet Summary Tags: core cpi, core inflation, CPI, Fed, inflation

Enough with Interest Rates Already

June 21, 2023 Michael Ashton 17 comments

One of the things which alternately frustrates me and fascinates me is the mythology surrounding the idea that the central bank can address inflation by manipulating the price of money, even if it ignores the quantity of money.

I say “mythology” because there is virtually no empirical support for this notion, and the theoretical support for it depends on a model of flows in the economy that seem contrary to how the economy actually works. The idea, coarsely, is that by making money more dear the central bank will make it harder for businesses to borrow and invest, and for consumers to borrow and spend; therefore growth will slow. This seems to be a reasonable description of how the world works. But this then gets tied into inflation by appealing to the idea that lower aggregate demand should lower price pressures, leading to lower inflation. The models are very clear on this point: lower growth causes less inflation and more growth causes more inflation. The fact that this doesn’t appear to be the case in practice seems not to have lessened the fervor of policymakers for this framework. This is the frustrating part – especially since there is a viable alternative framework which seems to actually describe how the world works in practice, and that is monetarism.

The fascinating part are the incredibly short memories that policymakers enjoy when it comes to pursuing new policy using their preferred framework. Here’s the simplest of examples: from December 2008 until December 2019, the Fed Funds target rate spent 65% of the time pinned at 0.25%. The average Fed funds rate over that period was 0.69%. During that period, core inflation ranged from a low of 0.6% in 2010 to a high of 2.4%, hitting either 2.3% or 2.4% in 2012, 2016, 2017, 2018, and 2019. That 0.6% was an aberration – fully 86% of the time over that 11 years, core inflation was between 1.5% and 2.4%. Ergo, it seems reasonable to point out that ultra–low interest rates did not seem to cause higher inflation. If that is our most-recent experience, then why would the Fed now be aggressively pursuing a theory that depends on the idea that high interest rates will cause lower inflation? The most-recent evidence we have is that interest rates do not seem to affect inflation.

This isn’t just a recent phenomenon. But the nice thing about the post-GFC period is that for a good part of it, the Fed was ignoring bank reserves and the money supply and effecting policy entirely through interest rates (well, occasionally squirting some QE around, but if anything that should have increased inflation – it certainly didn’t dampen the effect of low interest rates). This became explicit in 2014 when Joseph Gagnon and Brian Sack, shortly after leaving the Fed themselves, published “Monetary Policy with Abundant Liquidity: A New Operating Framework for the Federal Reserve.” In this piece, they argued that the Fed should ignore the quantity of reserves in the system, and simply change interest rates that it pays on reserves generated by its open market operations. The fundamental idea is that interest rates matter, and money does not, and the Fed dutifully has followed that framework ever since. As I just noted, though, the results of that experiment would seem to indicate that low interest rates, anyway, don’t seem to have the effect that would be predicted (and which effect is necessary if the policy is to be meaningful).

And really, this shouldn’t be a surprise because for the prior three decades, the level of the real policy rate (adjusting the nominal rate here by core CPI, not headline) has been completely unrelated to the subsequent change in core inflation.

So, to sum up: for at least 40 years, the level of real policy rates has had no discernable effect on changes in the level of inflation. And yet, current central bank dogma is that rates are the only thing that matters.

I stopped the chart in 2014 because that’s when the Gagnon/Sack experiment began, but it doesn’t really change anything to extend it to the current day. Actually, all you get is a massive acceleration and deceleration in core inflation that all happened before any interest rate changes affected growth (seeing as how we have not yet had a recession). So it’s a result-within-a-result, in fact.

Any observation about how the Fed manages the price of money rather than its quantity would not be complete without pointing out that the St. Louis Federal Reserve’s economist emeritus Daniel L Thorton, one of the last known monetarists at the Fed until his retirement, wrote a paper in 2012 entitled “Monetary Policy: Why Money Matters and Interest Rates Don’t” [emphasis in the original title]. In this well-argued, landmark, iconic, and totally ignored paper Dr. Thornton argued that the central bank should focus almost entirely on the quantity of money, and not its price. Naturally, this is concordant with my own view, plus more than a century of evidence around the world that the price level is closely tied to the quantity of money.

To be fair, the connection of changes in M2 to changes in the price level has also been weak since the mid-1990s, for reasons I’ve discussed at length elsewhere. But at least money has a history of being related to inflation, whereas interest rates do not (except as a result of inflation, rather than as a cause of them); moreover, we can rehabilitate money by separately modeling money velocity.

There does not appear to be any way to rehabilitate interest rate policy as a tool for addressing inflation. It hasn’t worked, it isn’t working, and it won’t work.

Categories: Causes of Inflation, Economics, Federal Reserve, Monetarism, Other Research Posts Tags: core cpi, core inflation, Fed, interest rates

Summary of My Post-CPI Tweets (May 2023)

June 13, 2023 Michael Ashton 3 comments

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy, but subscribers to @InflGuyPlus get the tweets in real time and a conference call wrapping it all up by about the time the stock market opens. Subscribe by going to the shop at https://inflationguy.blog/shop/ , where you can also subscribe to the Enduring Investments Quarterly Inflation Outlook. Sign up for email updates to my occasional articles here. Individual and institutional investors, issuers and risk managers with interests in this area be sure to stop by Enduring Investments! Check out the Inflation Guy podcast!

Welcome to the #CPI #inflation walkup for June (May’s figure).
A reminder: At 8:30ET, when the data drops, I will post a number of charts and numbers, in fairly rapid-fire succession. Then I will retweet some of those charts with comments attached. Then I’ll run some other charts.
This month I have to skip the conference call because my daughter has an awards ceremony I need to make. But later in the morning, I will post a summary of these tweets at https://inflationguy.blog and then podcast a summary at http://inflationguy.podbean.com .
Thanks again for subscribing!
Although both nominal and real interest rates have risen across the board since last month, breakevens have been fairly stable except at the very short end.

That represents relative weakness in BEI, which at this level of yields should be moving about 67% as much as 10-year nominal ylds and 2x as much as real ylds. Expectations have been declining partly because of weak energy markets, but then why are short breakevens wider?
In short, market pricing of medium-term inflation seems very confused right now.
That’s perhaps not so surprising. In addition to energy market softness, you also can see plenty of talk about how ‘wages might not cause inflation’ and how rents are due to decline (“no, really this time!”).
Let’s tackle these. First, rents. Ongoing argument on this one. Here’s my take: the former surge in rents was partly a catch-up from the eviction moratorium. I highlighted this divergence back when it first happened.

Now asking rents are declining and effective rents are still rising, beginning to close this gap. But note that the BLS rents figure never did keep pace with the asking OR effective rents.
The top lines haven’t converged yet (to be sure, these are quarterly figures) and the bottom line is behind. I know that current rent indicators had looked softer – although they’ve been recovering lately – but I don’t see a good reason to expect a LOT of softness here.
But if you really think that housing and the rental market are going to collapse like in 2009-10, then you’re going to have a hard time buying breakevens very much higher than you were paying in 2010.
Except wait…in 2010, 10-year breakevens averaged 2.06%. And they’re at 2.19% now. And we don’t seem to be close to any calamity remotely like we saw in 2008-2010.
I think these days, investors avoid buying breakevens not because they don’t believe there aren’t long tails to the medium-term upside, but because they’re worried about the short-term spikes to the downside. It’s MTM fear, not value, I think.
So, rents have been a persistent source of strength to CPI. They are ebbing, but not nearly as fast as the consensus thinks. Last month primary rents were +0.54% m/m. This doesn’t seem wildly high to me. The prior month is the outlier so far.
The other persistent source of strength, ALSO a story I was on a long time ago, is the core-services-ex-rents or “supercore,” which is significant because that’s where wage inflation lives.
There was an Economic Letter from the FRB San Fran a couple of weeks ago called “How Much Do Labor Costs Drive Inflation.” https://shorturl.at/fsvEN The author concludes that “labor-cost growth has a small effect on nonhousing services inflation…”
Well, duh. Obviously, inflation causes more-rapid wage growth, not the other way around. Cost-push inflation isn’t real – if it was, every laborer would love inflation because they would be AHEAD of it. That’s clearly wrong.
So everyone says “wow, this means that supercore doesn’t matter and the Fed might ease.” Except that nothing changes in this argument. Anyone who said core services ex-rents was important because it CAUSED inflation missed the point anyway.
Core services ex rents matters because it causes inflation PERSISTENCE by feeding back inflation. It makes inflation sticky. It doesn’t cause it to spiral higher.
Core services ex-rents will remain firm. That’s a good reason the Fed will not ease any time soon.
Heading into today’s number, both mainstream economists and Kalshi’s markets are looking for core CPI to match or fall short of the lowest core CPI so far in 2023 (0.385%, in March). I am higher. More on that in a second.

One reason I think core will be a little higher is that used car prices were roughly unchanged, but the seasonal adjustment expects a decline. So I think that will add about 3.5bps to the SA number by itself.
Interestingly, the lag structure from Black Book to CPI-Used Cars seems to have changed from 1 month to 0 months. That’s why everyone has been off on used cars recently. No idea why this shifted. Maybe it hasn’t, just a weird recent coincidence. But I don’t think so.

Headline CPI forecasts are pretty close between economists/market/me. I think Food isn’t going to add very much, which is why I’m below the consensus for headline even though above the consensus for core (Deutsche Bank made a similar point in a note out yesterday).
Now, the interesting thing is that after this month and next month, the interbank market is projecting essentially zero headline inflation for the balance of the year. Ran this chart in my blog at the end of May. https://inflationguy.blog/2023/05/31/is-inflation-dead-again/

June to December headline inflation is in the market at 0.125%. Total. That seems unlikely, even though the seasonal adjustment factors would turn that into a +1.4% which isn’t terrible. Still, it is hard to fathom that prices are just going to freeze in place NSA.
Not today’s problem, however! One step at a time. Good luck. I’ll be up with charts and chats right after 8:30ET.

Core +0.44%…worse than expected.
Both stocks and bonds acting like this is good news, so we’ll have to see the breakdown…
It might take people a minute to figure out that this was a solid miss on core. Yes, it was 0.4% versus 0.4% expectations, but it was just barely rounded down to 0.4% while the forecasts (except for mine) were rounded up.
Still pulling down data…the BLS is working very hard to make sure people can’t get it quickly. I can see that Used Cars was +4.4% m/m, which was more than I expected. Core Services jumped to 6.8% y/y versus 6.6%. OER was steady at 0.52% m/m; Primary at 0.49%.
Lodging was +1.80% m/m; but airfares -2.95% m/m (weak again…I just don’t see it!).
Energy dragged about 9bps on the headline, which was in line with my forecast. Food was +0.21% NSA m/m, about same as last month, but that’s a higher SA contribution. Food at home was +0.05% SA; Food away from home (wages y’all) was +0.47% SA. m/m
m/m CPI: 0.124% m/m Core CPI: 0.436%
Consensus missed on core by almost 6bps. My forecast was 0.43%. Headline was soft relative to core.

Last 12 core CPI figures
There is absolutely nothing disinflationary about this chart recently. Haven’t even rounded down to 0.3% on core in 6 months.

M/M, Y/Y, and prior Y/Y for 8 major subgroups
“Other goods and services” bears some looking into. Otherwise no large surprises.

Core Goods: 2.03% y/y Core Services: 6.57% y/y
Core goods maintained its prior y/y level but didn’t extend the bounce despite a nice rise in apparel. Core services is coming off but…not exactly dramatically!

Primary Rents: 8.66% y/y OER: 8.05% y/y
Is this the top of the rollercoaster, and how steep is the drop? Yes is the first answer, but ‘not so steep’ is what I think we’ll conclude on the second. M/M annualized are running at 6% or so, and I think we’ll probably end up between 5-6%. Much better than now, but not great.

Further: Primary Rents 0.49% M/M, 8.66% Y/Y (8.8% last) OER 0.52% M/M, 8.05% Y/Y (8.12% last) Lodging Away From Home 1.8% M/M, 3.4% Y/Y (3.3% last)
…by the way, the reason is higher taxes, higher wages, short supply.
Some ‘COVID’ Categories: Airfares -2.95% M/M (-2.55% Last) Lodging Away from Home 1.8% M/M (-2.96% Last) Used Cars/Trucks 4.42% M/M (4.45% Last) New Cars/Trucks -0.12% M/M (-0.22% Last)
I thought Used would contribute but it was heavier than I thought. New cars being down is surprising. Interesting that core goods was still flat even after this contribution and the contribution from apparel.

Here is my early and automated guess at Median CPI for this month: 0.427%
Median category by my calculation was West Urban OER, so the usual caveats apply about my seasonal adjustment. Might be a bit higher or a bit lower than this, couple of bps either way. However you look at it…no continued disinflation.

Piece 1: Food & Energy: -0.939% y/y

Piece 2: Core Commodities: 2.03% y/y

Piece 3: Core Services less Rent of Shelter: 4.38% y/y
“Supercore” was a little lower, but still at 4.4% y/y.

Piece 4: Rent of Shelter: 8.12% y/y

Probably the best news overall is that core ex-housing is down to 3.45% y/y.
Before I get to ‘other’, let’s look at Medical Care. 0.08% m/m. Pharma was +0.51%, and 3.99% y/y. Doctors’ Services was a drag at -0.50% m/m and -0.09% y/y. Medical Equipment and Supplies was +2.3% m/m (NSA), which is the reason this is positive. Health insurance the usual drag.
Keep in mind that when Health Insurance gets readjusted next year, Medical Care is going to turn on a dime and be a following wind pushing inflation up, not down. The Health Insurance curiosity is a major source of the apparent core inflation disinflation this year.
Other Goods and Services was +0.53% NSA M/M. And it was pretty broad. Cigarettes +0.6%, other tobacco products 0.44%, Personal care products +1%, Misc Personal Services +0.69%.

This is interesting. Really bipolar inflation distribution. Nothing in the middle. A lot of weight to the right, and then a big slug of things to the left. That’s why core is so much lower than median.
Only non-core things that declined more than 10% annualized in May were Car and Truck Rental (-33%) and Misc Personal Goods (-11.9%). Neither more than 0.15% of the consumption basket.
OVER 10% are Used Cars/Trucks (+68%), Motor Vehicle Insurance (+26%), Lodging Away from Home (+24%), and Personal Care Products (+12.8%).

Sort of reinforcing the distribution picture. The weight in “over 6% y/y” is declining but still heavy. Weight in <2% is about 25%, rising but still low.

Finally the EI Inflation Diffusion Index telling the same story. Upward pressures remain but are lessening. This reinforces the ‘inflation has peaked’ story but does not yet support the ‘inflation will crash to exactly 2%’ story.
Wrapping up: bonds like this because there is no reason in here for the Fed to reverse its promise of a pause, when they meet tomorrow. The Fed will stand pat. Stocks like this mainly because it removes that uncertainty.
There is nothing in here that supports the notion that the Fed will soon be able to stop worrying about inflation. M/M core inflation continues to run at a 5% ish level. Y/Y core will likely ease a little further on base effects through September and then level off.
My point forecast for 2023 Median Inflation has been around 5% since last May. It is starting to look like that might be slightly low but pretty decent I think.
Sort of the best-case for core CPI at year-end will be 4.25% y/y. Unless rents and wages suddenly (and inexplicably) drop, it’s going to be really hard to get it below that.
On the other hand, tightening further when inflation measures are gently declining will also be a hard argument. In short, I think the “Fed on hold for a long time” argument won the scorecard handily today.
We not only need lower inflation prints, but the distribution needs to get more uniform. Wages rising at 6% (Cleveland Fed WGT) is holding up services even as core commodities stop declining. Meeting in the middle still looks like 3-4%. Again, hard to ease, hard to tighten.
I think that’s about it for today. I’ll have a few more words in my blog and podcast summaries, but that’s the meat of it. I still think breakevens are too low for this environment!! Thanks for tuning in.

The chart of the day is the one of month/month core CPI figures. Here is another look at it, from Bloomberg. Tell me if you can spot the downtrend.

Nope, me neither. December’s was 0.40%, and the five core prints for this year were 0.41, 0.45, 0.38, 0.41, and 0.44. The six-month average is 0.42%. The 12-month average is 0.43%. The 24-month average is 0.46%. So, if there’s a downtrend, it’s a really gentle downtrend. Base effects from last year will cause the y/y number to glide down a little bit further, and base effects in headline inflation may cause that number to decline as well although that’s a lot less clear. We’re tracking towards something like 4-5% inflation. I’m a trifle more optimistic than that, thinking we will eventually settle in the 3-4% range, but my operating hypothesis for a while has been that we have entered a new distribution with a higher mean. I could still be wrong on that, of course, but so far there’s nothing to suggest that inflation is going back to 2%.

Unless, of course, you think rents are about to flop. There has been some recent research on that, and as a result there is near-unanimity of the view that rents are going to be flat to declining “soon.” I’ve read the research, and it’s not convincing. Error bars for the forecast period are very wide right up until we get actual data, and the period over which the relationship is purported to exist is not similar to the period we are in.

Remember, people also thought that home prices would collapse under the weight of higher interest rates. They dropped a couple of percent, and are rising again already. Not only that, but mortgage delinquencies just dropped to the lowest level in 20 years: not what you’d expect if higher rates are crushing homeowners. What higher rates are doing is hurting builders, who will build less as a result, and landlords, who will raise rents as a result. The fact that economists want monetary policy and inflation to work this way isn’t sufficient. It just doesn’t.

This is not to say that there aren’t some good trends in the data. Our diffusion index clearly signals that the pressures towards higher prices are slackening. Some products and services that had seen extreme spikes are retracing. But wage growth is still 6%, and there are still a lot of goods and services which haven’t yet fully adjusted to the new price level. So: there will continue to be volatility in prices for a while, with some good news and some bad news and a gentle trend towards less inflation.

Sounds like “Fed on hold” to me.

Categories: CPI, Federal Reserve, Tweet Summary Tags: core cpi, core inflation, CPI, Fed, inflation

Summary of My Post-CPI Tweets (April 2023)

May 10, 2023 Michael Ashton 2 comments

Welcome to the #CPI #inflation walkup for May (April’s figure).
A reminder: At 8:30ET, when the data drops, I will post a number of charts and numbers, in fairly rapid-fire succession. Then I will retweet some of those charts with comments attached. Then I’ll run some other charts.
After the tweeting dies down, I will have a private conference call for subscribers where I’ll quickly summarize the numbers. After my comments on the number, I will post a partial summary at https://inflationguy.blog and later will podcast a summary at http://inflationguy.podbean.com.
Thanks again for subscribing!
The market backdrop going into this one is very different from last month, when we were still dealing with panicky banking-collapse stuff. There are still some people selling that story, but there’s no real meat to it.
But breakevens have come in, and real yields risen. And the Fed has tightened for what is likely the last time in the cycle. Some people are REALLY sold on the deflationary-depression scenario but right now shaping up to be a mildish recession with continued high inflation.

That’s going to put the Fed in a classic bind, but with this Fed…maybe not really. I’ll say more about what I think about the Fed (big picture) in our Quarterly next week (subscribe at https://inflationguy.blog/shop/) but in sum I think O/N rates stay high all year.
Next year, when inflation is still not coming down to their target (I think), they’ll have some decisions to make but for now, a mild recession won’t get them easing aggressively as they did under Greenspan/Bernanke/Yellen. It’ll be Silence of the Doves.
The forecasts this month have amazing agreement in the headline figure, which is interesting because Kalshi and economists’ estimates have been rising meaningfully over the last week or so. I’ve been pretty consistent. I agree on headline. I’m significantly higher in core.

Here’s why.
Last month, core was a little soft, but not a ton. That in itself was remarkable, because rents decelerated a LOT m/m. And used cars was also a drag despite private surveys suggesting it should have been an add.
So the fact that core was just a LITTLE soft was pretty amazing. Median (a better measure) dropped a lot because of rents, but the fact that core was resilient tells you there were some long-tail upsides. Diffusion indices are showing strongly that the peak is in, but…
…but Core Goods having possibly bottomed (Used Cars should FINALLY deliver this month) means that the deceleration is going to be all rents and core services from here. So same stories but getting bigger going forward as the turn in Core Goods runs its course.
And I do not believe in the sudden deceleration in rents – because nothing in rents happens suddenly. I think all the folks who have been looking for it for a while are succumbing to confirmation bias in thinking this is real.
Maybe they’re right – another weak rents number will mean a lot to me. But I took note that the y/y rents figures still rose, which means that last year in the same month it was even weaker! That smacks to me of seasonal-adjustment issues.
That doesn’t explain the full deceleration from 0.7 to 0.5 in rents, but it would explain some. I think we’re going to bounce back, but if we get another 0.48% on primary and OER, I’ll take notice.
I also want to look at Food Away from Home. I wrote about this last week https://inflationguy.blog/2023/05/04/food-inflation-served-hot-and-cold/ – Food At Home and Food Away from Home have now diverged, and the FafH is tied more closely to wages.
So: Core ex-rents, but also rents. And Food Away from Home as part of the Core ex-rents-imbued-with-momentum-from-wages meme.
Do note that y/y core will decline even if we get my number (0.46%), and likely median also. It will help cement the idea the Fed is going to wait for a while.
(Then again, last month I said I didn’t think they’d do 25bps because 25bps just doesn’t matter. But now we also have them signaling as much. It’ll take a lot to get them to move either direction soon.)
Honestly, I need to step back and watch for a while myself. So far, the last few years have been relatively easy to call. But now we have a rapid rebound in velocity (which I expected) and declining M2 (which I did not).
For the trajectory of inflation beyond this summer, we need to know which of these is going to win. I have trouble believing M2 will keep declining, especially as money demand gets adjusted to the new interest rate regime. But it’s an open question.
And a very important question! And one that will not be resolved today! But it will be an interesting report I think – I’ll be back with more at 8:31ET. Good luck.

okay. 0.409 on core…pretty darn good work by economists and Kalshi!
Very nice jump from Used Cars…+4.5% m/m. So that’s an overdue catchup.
OER 0.54 and Primary Rents +0.56 m/m. That’s a jump compared to the prior month, but quite a bit lower than trend. Some deceleration is probably happening, but last month was an illusion as to how much, probably from seasonal quirks.
Core goods rose to 2.0% y/y (largely on the strength of the aforementioned Used Cars) and Core services fell to 6.8% y/y.
Here is Core. This month right in trend. 0.4% is still almost 5% per year!

Median retained most of its deceleration…but didn’t decelerate further m/m. Oddly, also 0.41% as with core. Normal warning: looks like one of the regional OERsis the median category – ergo, my estimate might be off since I have to guess at seasonals.

Medical Care was the usual drag, but everything else was positive. There were some drags, but mainly the story here is rent deceleration.

I noted the acceleration in core goods, which is mostly used cars this month. But I think the macro trend that we’ve seen most of the core goods deceleration is in place. Will it bounce to 5%? Probably not. But it’s no longer going to drag overall inflation lower.

Primary Rents have officially peaked. OER, not yet. Soon. As with the overall inflation numbers, which peaked but won’t be declining as much as people were expecting, so it will be with rents.

So in the so-called COVID categories, Airfares were -2.5% m/m; Lodging Away from Home -3.0%; Food @ Home -0.17%(sa) and Food Away from Home +0.37%(sa). This latter is a noticeable slowdown.
Piece 1: As-expected look. I thought Food would add 0.03% to CPI but it actually added about 0.02% it appears. Nothing surprising in this.

Piece 2 is Core Commodities – already commented on this.

Core Services less ROS – this is starting to look less-horrible. Still, 5% isn’t lovely but this is the wage-driven piece. Taken together with the Food-Away-from-Home improvement, there seems to be some signs that the wage-price feedback is slowing some. And that’s good news.

And rents are still high. While the Core Services piece is showing decent signs that it may have peaked, a deceleration in rents is still an article of faith. It will happen, but I don’t see it falling to 2% or lower, which is where some people think it’s going.

(Some people still think housing is going to collapse. It’s not going to. Prices are already starting to rise again.)
Core ex-housing went from 3.81% y/y to 3.75% y/y. Still pretty high even with the drag from core goods. Overall, the picture is IMPROVING but not good yet.
…and that story, actually, supports the idea of a Fed pause. “We finally turned back the attackers from the walls. Now let’s wait and see if they regroup or if the battle is over.” That’s the wise course.
You know, I gave economists a bit too much credit earlier. Their HEADLINE guesses were 0.41. Their core numbers were lower. We were about equally off. I was too high, because I thought rents would rebound more than they did. They were too low, for whatever reason.
Sort of interesting that Recreation was +0.5% m/m. That’s a heterogenous category so it usually doesn’t do a lot. This month, Video and Audio was +0.45% (nsa) and Pets were +1.82%(nsa). Those are the two largest pieces of Recreation. Interesting bump from pets.
Within Medical Care, Doctors’ Services was a drag and now is just +0.27% y/y! But Pharma added 0.42% m/m. The insurance drag continues to be what keeps that category inert (and, actually, it’s in core services ex rents so it’s also holding down “Supercore” some).
Nothing really illuminating amongst the biggest gainers/decliners. Core categories Public Transportation was -46% (annualized monthly, which is what goes into median), Car/Truck rental -33%, Lodging Away from Home -30%.
Gainers: Motor Vehicle Insurance +18%, Misc Pers Svcs +33%, Used Cares +69%. Actually some people say the insurance part is likely to continue for a bit. Lots of theft and higher car prices means that insurance rates need to rise too because cost-of-replacement is higher.
Diffusion index down to 14!

Okay, let’s try a conference call. Bottom line is I don’t think this figure is as good as stocks seem to think. But it DOES support the Fed-on-hold thesis. Still, it was a little higher than expected. Here is the conference number. I’ll start in 7 minutes.

Today’s number, while higher than expected on core by a little bit, was roughly in line with expectations. I was higher on my forecast than the consensus, because I thought rents would bounce back further and they didn’t; others were too high because they thought rents would keep dropping. I think that’s the main difference. Most of the rest of what is happening in the number was roughly what people expected. It was nice to see Used Cars bounce, since they were about 2 months behind what the private surveys were promising us – so not really a surprise.

While this is an expected number, that’s not saying it’s a wonderful figure. 0.4% monthly on core CPI…which is where we have been for the last 5 months…still gets you only to about 5% core for the year. That’s not where the Fed wants to see it.

On the other hand, it’s also clearly off the boil and most of the CPI is decelerating at least a little bit. It’s nice to see core services ex-rents (so-called “supercore”) decelerating, although we should remember that includes Health Insurance which is in the midst of a year-long mechanical adjustment that will swing the other way in about 6 months. But overall, the arrows are pointing in the right direction.

That’s distinctly unlike what was happening with the “transitory” nonsense, when the great bulk of the CPI was moving in the wrong direction – and not just the transitory pieces. So this is welcome.

And it supports the Fed’s decision to pause in rate hikes while continuing to slowly reduce its balance sheet. As long as the numbers continue to decline and nothing blows up that demands the Fed’s immediate attention, rates will stay on hold. I don’t think a minor recession, with inflation at 5%, will get the Fed to ease. Now, 6 months from now when it becomes obvious that inflation isn’t going back to the Fed’s target they’ll have some decisions to make, but that’s a story that will play out in slow motion. For now, we have a figure that supports ex-post-facto what the Fed chose to do this month.

Categories: CPI, Tweet Summary Tags: core cpi, core inflation, CPI, Fed, inflation

Summary of My Post-CPI Tweets (March 2023)

April 12, 2023 Michael Ashton Leave a comment

Note that since the post-8:30am charts were tweeted rapidly and commentary added to it by later re-tweets, the summary below is rearranged to eliminate the redundancy and improve readability.

Welcome to the #CPI #inflation walkup for April! (March’s CPI figure)
A reminder to subscribers of the tweet schedule: At 8:30ET, when the data drops, I will post a number of charts and numbers, in fairly rapid-fire succession. Then I will retweet some of those charts with comments attached. Then I’ll run some other charts.
There is a small wrinkle this month: I am going to be a guest on a Twitter space hosted by @Unusual_Whales while I’m busy tweeting. That shouldn’t impact you subscribers. Tune in if you want!
After the tweeting dies down, I will have a private conference call for subscribers where I’ll quickly summarize the numbers. After my comments on the number, I will post a partial summary at https://inflationguy.blog and later will podcast a summary at inflationguy.podbean.com .
I will also record that call for later call-in if you’re not available (and of course later there will be my tweet summary, and my podcast, so you can consume my opinions however suits you).
Thanks again for subscribing! And now for the walkup.(Some of this I’ve related over the last few days and am summarizing/repeating here.)
The whole banking-collapse thing seems to have blown over for now, but interest rates are still lower than they were a month ago. And breakevens are higher. This is one reason stocks are doing well – steady infl expectations and lower real yields is a sweet cocktail for equities.

It’s also likely fleeting, but it helps explain why the market is doing so well for now.
Today’s CPI print might be very interesting. There are a lot of crosscurrents and everyone seems to be interpreting them differently. The spread isn’t super wide, but the swaps market is almost a full 0.1% below economists’ estimate for headline inflation.

(The swaps market tends to be more accurate than economists in this regard, but I hope this month they aren’t because I have the over.)
The drag on inflation is not going to come from food; raw foods are again spiking and there’s still the wage issues for food-away-from-home. I have gasoline adding 3bps, while some others see it flat or subtracting slightly. But the big drag is piped gas.
As I noted on Monday, piped gas is part of household energy and normally it is too small to matter. But the massive recent decline pulled down February CPI and should pull down March. I have the effect worth 13bps.

But also, lower utilities implies that primary rents will have a small tailwind UPWARD and most people will ignore that. The reason it happens is the BLS backs out utilities when rents include utilities, so sharply lower utilities implies slightly higher rents.
Anyway, that’s the big drag. But why does the swap market see it as so much bigger than economists do? That’s odd. Or it could imply the Street sees a real drag on core…but that’s a hard sell right now.
Last month, Used Cars did not rise along with the private indices, but those indices rose again and so it’s likely we’ve seen the end of the price retracement from Used Cars. Indeed, Core Goods is showing signs that it is not going to gently go to -1%.
Heck, in my view the economists are too low on core anyway – they’re 0.05% below the traders on Kalshi’s core inflation market, and 0.1% below me. Is it possible we can get 0.4% or lower on core? Sure. But there are a lot of upward pressures.
This chart shows median wages minus median CPI. For years, it has been stable at about 1%, other than in the aftermath of disaster. Right now it isn’t, b/c Median CPI is still rising while median wages have ebbed although just a little.

Now, this chart might say something different to you than to me. My interpretation is that employees will fight against further declines in wage growth, until inflation comes down. But you might argue that this gives room for CPI to decelerate.
Since we are focused on the wage-price feedback loop in core-services-ex-shelter (as I was saying long before the cool kids dubbed it “supercore”), the resolution of this question is very, very important.
Anyway, I think we will see 0.5% on core inflation. But even if we only see 0.4%, y/y core will rise. Not many will get too exercised about that, though, because the easy comps are coming. By May, we will likely see y/y core start declining again.

Of course, I’m focused on median CPI, which is still hitting new highs. But it also should start ebbing soon. As always, the question is “how much” and I continue to say “not as much as the market is pricing in.” With breakevens in the low 2s, they’re very cheap in my view.
We will see what the number brings. But unless it’s even higher than I have it, and with an alarming breadth, I think the Fed is likely done hiking. As I said last month, 25bps doesn’t do anything at this stage anyway.
But +0.5% on core will be taken very badly by the stock market, I think, and probably pretty bad for bonds as well. Everyone wants fervently to believe with the inflation swaps market that this inflation episode is over.
Doesn’t look like it to me. Not yet! Good luck today and I’ll be back live at 8:31ET.

Definitely better than expected. Swap market as usual is closer than economists…and core was actually was .053%
m/m CPI: 0.053% m/m Core CPI: 0.385%
Kneejerk observations: Used Cars dragged again (?). RENTS WERE SHARPLY LOWER FROM TREND. Medical Care was a drag.
Last 12 core CPI figures

Inflation Swap market gets closest-to-the-pin. In fact, Headline rounded UP to 0.1%. Core was actually kinda close to expectations (but lower than I thought!).
M/M, Y/Y, and prior Y/Y for 8 major subgroups

The big story here is going to be housing. Housing 0.3% m/m is a big decline. Some of that is piped gas, but…
Core Goods: 1.53% y/y Core Services: 7.13% y/y

Now, notice that core goods turned up. That’s even though CPI for Used Cars declined. Again, that is unexpected since private surveys have said used car prices are going back up.
Primary Rents: 8.81% y/y OER: 8.04% y/y

…still not peaked, but peaking? Actually y/y higher this month, so it’s possible there’s some seasonality issue.
Further: Primary Rents 0.49% M/M, 8.81% Y/Y (8.76% last) OER 0.48% M/M, 8.04% Y/Y (8.01% last) Lodging Away From Home 2.7% M/M, 7.3% Y/Y (6.7% last)
(This really is the big story today. Actually, core being that high despite housing…is surprising.)
Actually core ex-shelter rose very slightly to 3.81% y/y.
Here is my early and automated guess at Median CPI for this month: 0.401%

Some ‘COVID’ Categories: Airfares 3.96% M/M (6.38% Last) Lodging Away from Home 2.7% M/M (2.26% Last) Used Cars/Trucks -0.88% M/M (-2.77% Last) New Cars/Trucks 0.38% M/M (0.18% Last)
Piece 1: Food & Energy: 2.63% y/y

A lot of the recent plunge here is piped gas…which is just about done.
Piece 2: Core Commodities: 1.53% y/y

Piece 3: Core Services less Rent of Shelter: 5.53% y/y

Supercore coming down! But just a little. Still not sure this is thrilling enough for the Fed.
Piece 4: Rent of Shelter: 8.26% y/y

The distribution here is going to be really important. Unfortunately my data scraper is having a strange issue and that feeds my distribution stuff. Obviously the middle shifted, which is why median CPI decelerated, but I want to see the diffusion stuff. Tech delay for me…
Piped gas actually fell only -8.0% m/m NSA, versus -9.3% last month. I thought it was going to be greater, so there was a slightly SMALLER drag on headline than I expected there.
Also encouraging is that Food and Beverages was only 0.02% m/m. I’m a little surprised by that, but it’s good news. Non-core of course.
I will say the bottom line is that IF the housing data is real, then this is a really happy inflation number. But outside of the housing data…core was still 0.4%! So not GREAT data. The distribution data will be important, which is why it’s even more frustrating atm.
I can also report that the biggest decliners in core m/m were Car/Truck Rental (-37% annualized monthly change), Energy Services (-24%), Misc Personal Goods (-14%) and Used Cars/Trucks (-10%). Latter I’ve already mentioned is really odd.
Biggest gainers are Public Transportation (+46%), Lodging Away from Home (+38%), Motor Vehicle Insurance (+16%), Mens/Boys Apparel (+13%), and Personal Care Products (+10%).
We are obviously not going to have the conference call today…too late to be of any use. But I have some thoughts anyway about the Fed and the positive market reaction.
Totally understand the positive market reaction. The headline figure ALMOST rounded to unchanged, and core was a little light although not very much. The rally makes sense.
The dive in longer-term breakevens doesn’t, as much. If you think this big deceleration in shelter is real then it means inflation is probably peaking even in a median sense…but long-term breakevens already impound a 2.2% average inflation rate.
There is nothing to make me think that rents are going to go flat, with median wages rising at 6% and home prices advancing again. This is not 2009-10 and there is still a big shortage in shelter and plenty of income to support rents. So 2%…is still very unlikely IMO.
That said, let’s think about the Fed. Start from the premise that their model is assuming high-frequency rent data is predictive, even though it’s been predicting rent deceleration for a long time and this is the first sign of it.
But if your null is “I’m waiting for rental inflation to turn” and then you see a sign of a turn…well, it’s bad econometrics to “confirm” a hypothesis but that’s how humans work. I think this makes a further hike fairly unlikely unless the Fed wants to make a symbolic gesture.
With Fed funds at 5% and at least SOME concerns about banking, the juice doesn’t seem to be worth the squeeze to hike again. Which is, of course, why markets are ebullient today.
I don’t think we’re out of the woods on inflation yet. I should have missed this number by a LOT more than I did given I was 0.25% off on the largest part of core. It means the strength is still broad.
But the question has never been “WILL inflation go back down someday.” It has been about WHEN. And how far…but not so many people are questioning that when it goes back down, it’ll go to 2%.
There’s just no natural reason that should happen. It’s a pleasant wish, but there’s no mechanism to cause inflation to go to the Fed’s target naturally. And as I’ve shown recently, there’s actually not much evidence that inflation mean reverts at all…even if the mean IS 2%.
So…good news today, and the Fed will take it as such. As will markets. But here is the chart of m/m primary rents. This doesn’t seem entirely plausible to me. Give me another month or two and I’ll be a believer.

Anyway, thanks for tuning in, and bearing with me despite the tech issues. I will update the diffusion index when I get the problem fixed.

Today’s inflation data was clearly positive, but how positive it is depends on whether rents are suddenly decelerating in the way the data says they did in March. That seems implausible to me, but it’s possible. As I said above, the question was never whether inflation would stop going up, but when, and how far it falls back. We thought median inflation had peaked in September, and then it went higher. It now looks like it has peaked again – and this is likely the case. But we’ve been fooled before.

Here’s a crucial point to keep in mind, though, when we are predicting Fed action. What’s their null? If my null hypothesis is that inflation is unlikely to slow below 4%, say, then I need a lot more evidence before I stop hiking rates. I know that many of you reading this fall into that camp. But does that mindset characterize the central bank’s thinking? What I think we know about the Fed right now is that they are moderately (but only moderately) concerned about the banking system; they are concerned about core services ex-shelter because of the wage-price feedback loop I’ve been highlighting since long before they did; and they believe that higher-frequency data on rents suggests that rent inflation should be ebbing ‘soon.’ Chairman Powell has said all of these things.

So if that’s the case, how does it frame today’s data?

There’s nothing new in this about banking. But there does seem to be information which would confirm what I am assuming to be the Fed’s ‘priors’ about rents. To me, that one month doesn’t mean a lot, but to someone who has been expecting a deceleration, this probably looks like one. There’s also nothing here about wages per se, although “supercore” is decelerating some. However, I think the Fed already believes wages are declining, because they tend to focus more on “Average Hourly Earnings” from the Employment report. That’s a terrible measure, but it’s widely used. (In fact, for most economic data you want to ignore “average” measures if the composition can change a lot from report to report, like the employment report can). Here’s a chart of AHE, against my preferred measure of median wages of continuously-employed persons, from the Atlanta Fed (in blue).

If I’m right and the Fed is focusing on the black line rather than the blue line, and I’m right about how they are thinking about rents, then I think if you took a poll of Fed thinkers you’d find that most of them think they’ve broken the back of inflation and the only question is how quickly it gets back to 2%. I suspect most of them would prefer to keep rates where they are, and not lower them quickly, because you want to keep the pressure on…but I believe the argument for pushing rates a lot higher is substantially weakened by recent data – that is, if you share those priors.

My view is unchanged, although I will keep an eye on rents. My model has them coming down to 4% or so, but then my model never had them getting much higher than 5%. Some of that is an overshoot thanks to the correction after the eviction moratorium was lifted, but a lot of that in my opinion is supported by the big shortage of shelter and by strong wage growth. I’m not sure why we’d expect rents to fall drastically, especially if a landlord’s cost of financing and of maintenance are still rising. Overall, I think inflation is in retreat thanks to a contracting money supply although that is offset by the rebound in money velocity. But I don’t expect inflation to get to 2% any time this year or in 2024. More likely, we will settle in around 4%-5% later this year. That’s my null hypothesis!

Categories: CPI, Federal Reserve, Tweet Summary Tags: core cpi, core inflation, CPI, Fed, inflation

Summary of My Post-CPI Tweets (February 2023)

March 14, 2023 Michael Ashton 1 comment

Welcome to the #CPI #inflation walkup! To be sure, the importance of this data point in the short run is much less than it was a week ago, but it would be a mistake to lose sight of inflation now that the Fed is likely moving from QT to QE again.
A reminder to subscribers of the tweet schedule: At 8:30ET, when the data drops, I will post a number of charts and numbers, in fairly rapid-fire succession. Then I will retweet some of those charts with comments attached. Then I’ll run some other charts.
Afterwards (recently it’s been 9:30ish) I will have a private conference call for subscribers where I’ll quickly summarize the numbers.
After my comments on the number, I will post a partial summary at https://inflationguy.blog and later will podcast a summary at inflationguy.podbean.com .
I am also going to try and record the conference call for later. I think I’ve figured out how to do that. If I’m successful, I’ll tweet that later also.
Thanks again for subscribing! And now for the walkup.
This picture of the last month has changed quite a bit over the last few days! Suddenly, rates have reversed and the nominal curve is steepening. The inflation market readings are…of sketchy quality at the moment.

Now, the swap market has also re-priced the inflation trough: instead of 2.65% in June (was in low 2s not long ago), the infl swap market now has y/y bottoming at 3.34% b/c of base effects before bouncing to 3.7% & then down to 3.15% by year-end. I think that’s pretty unlikely.
Let’s remember that Median CPI reached a new high JUST LAST MONTH, contrary to expectations (including mine). The disturbing inflation trend is what had persuaded investors…until late last week…that the Fed might abruptly lurch back to a 50bp hike.
These are real trends…so I’m not sure why economists are acting as if they are still certain that inflation is decelerating. The evidence that it is, so far at least, is sparse.
Also, this month not only did the Manheim used car index rise again, but Black Book (historically a better fit although BLS has changed their sampling source so we’re not sure) also did. I have that adding 0.04%-0.05% to core.
But maybe this is a good time to step back a bit, because of the diminished importance of this report (to be sure, if we get a clean 0.5%, it’s going to be very problematic for the Fed which means it should also be problematic for equity investors).
Over the last few days we’ve read a lot about how banks are seeing deposits leave for higher-yielding opportunities. This is completely expected: as interest rates rise, the demand for real cash balances declines.
You may have heard me say that before. But it’s really Friedman who said that first: velocity is the inverse of the demand for real cash balances. DEPOSITS LEAVING FOR HIGHER YIELDS IS EXACTLY WHAT HIGHER VELOCITY MEANS.
And it is the reason for the very high correlation of velocity with interest rates.
So the backdrop is this: money may be declining slightly but velocity is rebounding hard. Exactly as we should expect. Our model is shown here – it’s heavily influenced by interest rates (but not only interest rates).

And if the Fed is going to move from its modest QT to QE, especially if they don’t ALSO slash rates back towards zero, then the inflationary impulse has little reason to fade.
You know, I said back when the Fed started hiking that they would stop once the market forced them to. What has been amazing is that there were no accidents until now, so the market let them go for it. And in the long run this is good news – rates nearer neutral.
But we have now had some bumps (and to be fair, I said no accidents until now but of course if the FDIC and Fed had been doing their job and monitoring duration gaps…this accident started many many months ago).
With respect to how the Fed responds to this number: it is important to remember that the IMPACT ON INFLATION of an incremental 25bps or 50bps is almost zero. Especially in the short run. It might even be precisely zero.
But the impact of 25bps or 50bps on attitudes, on deposit flight, and on liquidity hoarding could be severe, in the short run. On the other hand, if the Fed stands pat and does nothing but end QT, it might smack of panic.
If I were at the Fed, I’d be deciding between 25bps and 0bps. And the only decent argument for 25bps is that it evinces a “business as usual” air. It won’t affect 2023 inflation at all (even using the Fed’s models which assume rates affect inflation).
Here are the forecasts I have for the number – I tweeted this yesterday too. I’m a full 0.1% higher on core than the Street economists, market, and Kalshi. But I’m in-line on headline. So obviously as noted above I see the risks as higher.

Market reactions? If we get my number or higher, it creates an obvious dilemma for the Fed and that means bad things for the market no matter how the Fed resolves that. Do they ignore inflation or ignore market stability?
If we get lower than the economists’ expectation (on core), then it’s good news for the market because MAYBE it means the Fed isn’t in quite such a bad box and can do more to support liquidity (read: support the mo mo stock guys).
So – maybe this report is important after all! Good luck today. I will be back live at 8:31ET.

Well, headline was below core!
Waiting for database to update but on a glance this doesn’t look good. Core was an upside surprise slightly and that was with used cars a DRAG.
m/m CPI: 0.37% m/m Core CPI: 0.452%
Last 12 core CPI figures

So this to me looks like bad news. I don’t see the deceleration that everyone was looking for. We will look at some of the breakdown in a minute.
M/M, Y/Y, and prior Y/Y for 8 major subgroups

Standing out a couple of things: Apparel (small weight) jumps again…surprising. And Medical Care is back to a drag…some of that is insurance adjustment (-4.07% m/m, pretty normal) and some is Doctors Services (-0.52% m/m), while Pharma (0.14%) only a small add.
Core Goods: 1.03% y/y Core Services: 7.26% y/y

We start to see the problem here: any drag continues to be in core goods. Core goods does not have unlimited downside especially with the USD on the back foot. Core services…no sign of slowing.
Primary Rents: 8.76% y/y OER: 8.01% y/y

And rents…still accelerating y/y.
Further: Primary Rents 0.76% M/M, 8.76% Y/Y (8.56% last) OER 0.7% M/M, 8.01% Y/Y (7.76% last) Lodging Away From Home 2.3% M/M, 6.7% Y/Y (7.7% last)
Last month, OER and Primary Rents had slipped a bit and econs assumed that was the start of the deceleration. Maybe, but they re-accelerated a bit this month. Lodging away from home a decent m/m jump, but actually declined y/y so you can see that’s seasonal.
Some ‘COVID’ Categories: Airfares 6.38% M/M (-2.15% Last) Lodging Away from Home 2.26% M/M (1.2% Last) Used Cars/Trucks -2.77% M/M (-1.94% Last) New Cars/Trucks 0.18% M/M (0.23% Last)
FINALLY we see the rise in airfares that has been long overdue. I expected this to add 0.01% to core; it actually added 0.05%. Those who want to say this is a good number will screech “outlier!” but really it’s just catching up. The outlier is used cars.
Both the Manheim and Black Book surveys clearly showed an increase in used car prices. But the BLS has recently changed methodologies on autos. Not clear what they’re using. Maybe it’s just timing and used will add back next month. We will see.
Here is my early and automated guess at Median CPI for this month: 0.634%

Now, the caveat to this chart is that I was off last month (the actual figure reported is shown), but that was January. I think I’ll be better on February. I have the median category as Food Away from Home. This chart is bad news for the deceleration crowd, and for the Fed.
Piece 1: Food & Energy: 7.97% y/y

OK, Food and Energy is decelerating, but both still contributed high rates of change. Energy will oscillate. It is uncomfortable that Food is still adding.
Piece 2: Core Commodities: 1.03% y/y

This is the reason headline was lower than expected. Core goods – in this case largely Used Cars, which I thought would add 0.05% and instead subtracted 0.09% from core. That’s a -14bps swing. +5bps from airfares, but health insurance was a drag…and we were still >consensus.
Piece 3: Core Services less Rent of Shelter: 5.96% y/y

…and this is the engine that NEEDS to be heading sharply lower if we’re going to get to 3.15% by end of year. It’s drooping, but not hard.
Piece 4: Rent of Shelter: 8.18% y/y

…and I already talked about this. No deceleration evident. As an aside, it’s not clear why we would see one with rising landlord costs, a shortage of housing, and robust wage gains, but…it’s an article of faith out there.
Core inflation ex-shelter decelerated from 3.94% y/y to 3.74% y/y. That’s good news, although mainly it serves to amplify Used Cars…but look, even if you take out the big add from sticky shelter, we’re still not anywhere near target.
Equity investors seem to love this figure. Be kind. They’re not thinking clearly these days. It’s a bad number that makes the Fed’s job really difficult.
Note that Nick Timiraos didn’t signal anything yesterday…that means the Fed hasn’t decided yet. Which means they cared about this number. Which means to me that we’re likely getting 25bps, not 0bps. Now, maybe they just wanted to watch banking for another few days, but…
…the inflation news isn’t good. As I said up top, 25bps doesn’t mean anything to inflation, but if they skip then it means we are back in QE and hold onto your hats because inflation is going to be a problem for a while.
Even if they hike, they will probably arrest QT – and that was the only part of policy that was helping. Higher rates was just accelerating velocity. But I digress. Point is, this is a bad print for a Fed hoping for an all-clear hint.
The only core categories with annualized monthly changes lower than -10% was Used Cars and Trucks (-29%). Core categories ABOVE +10% annualized monthly: Public Transport (+46%), Lodging AFH (+31%), Jewelry/Watches (+20%), Misc Personal Svcs (+17.7%), Footwear (+18%), >>>
Women’s/Girls’ Apparel (+15%), Tobacco and Smoking Products (+13%), Recreation (+11%), Motor Vehicle Insurance (+11%), Infants’/Toddlers’ Apparel (+11%), and Misc Personal Goods (+10%). Although I also have South Urban OER at +10%, using my seasonality estimate.
On the Medical Care piece, we really should keep in mind this steady drag from the crazy Health Insurance plug estimate for this year. It’ll almost certainly be an add next year. Imagine where we’d be on core if that was merely flat rather than in unprecedented deflation.
Let’s go back to median for a bit. The m/m Median was 0.63% (my estimate), which is right in line with last month. The caveat is that the median category was Food Away from Home but that was surrounded by a couple of OER categories which are the ones I have to estimate. [Corrected from original tweet, which cited 0.55% as my median estimate]
I can’t re-emphasize this enough. Inflation still hasn’t PEAKED, much less started to decline.

One place we had seen some improvement was in narrowing BREADTH of inflation. Still broad, but narrower. However, this month it broadened again just a bit and the EIIDI ticked higher. Higher median, broader inflation…and that’s with Used Cars a strange drag.

Stocks still don’t get it, but breakevens do. The 10y BEI is +7bps today. ESH3 is +49 points though!
We’ll stop it there for now. Conference call will be at 9:30ET (10 minutes). (518) [redacted] Access Code [redacted]. I will be trying to record this one for playback for subscribers who can’t tune in then.
The conference call recording seemed to go well. If you want to listen to it, you can call the playback number at (757) 841-1077, access code 736735. The recording is about 12 minutes long.

In retrospect, my forecast of 0.4% on seasonally-adjusted headline and 0.5% on core looks pretty good…but that’s only because we got significant downward one-offs, notably from Used Cars. If Used Cars had come in where I was expecting (+1.4%) instead of where it actually came in (-2.8%), and the rest of the report had been the same, then core inflation would have been 0.6% and we would be having a very different discussion right now.

As it is, this is not the number that the Fed needed. Inflation has not yet peaked, and that’s with Health Insurance providing a 4-5bps drag every month. That’s with Used Cars showing a drag instead of the contribution I expected. The “transitory” folks will be pointing to rents and saying that it seems ridiculous, and ‘clearly must decline,’ but that’s not as clear to me. Landlords are facing increased costs for maintenance, financing, energy, taxes; there is a shortage of housing so there is a line of tenants waiting to rent, and wage growth remains robust so these tenants can pay. Why should rents decelerate or even (as some people have been declaring) decline?

Apparel was also a surprising add. Its weight is low but the strength is surprising. A chart of the apparel index is below. Clothing prices now are higher than they’ve been since 2000. The USA imports almost all of its apparel. This is a picture of the effect of deglobalization, perhaps.

So all of this isn’t what the Fed wanted to see. A nice, soft inflation report would have allowed the Fed to gracefully turn to supporting markets and banks, and put the inflation fight on hold at least temporarily. But the water is still boiling and the pot needs to be attended. I think it would be difficult for the Fed to eschew any rate hike at all, given this context. However, I do believe they’ll stop QT – selling bonds will only make the mark-to-market of bank securities holdings worse.

But in the bigger picture, the FOMC at some point needs to address the question of why nearly 500bps of rate hikes have had no measurable effect on inflation. Are the lags just much longer than they thought, and longer than in the past? That seems a difficult argument. But it may be more palatable to them than considering whether increasing interest rates by fiat while maintaining huge quantities of excess reserves is a strategy that – as monetarists would say and have been saying – should not have a significant effect on inflation. The Fed models of monetary policy transmission have been terribly inaccurate. The right thing to do is to go back to first principles and ask whether the models are wrong, especially since there is a cogent alternative theory that could be considered.

Back when I wrote What’s Wrong With Money?, my prescription for unwinding the extraordinary largesse of the global financial crisis – never mind the orders-of-magnitude larger QE of COVID policy response – was exactly the opposite. I said the Fed should decrease the money supply, while holding interest rates down (since, if interest rates rise, velocity should be expected to rise as well and this will exacerbate the problem in the short-term). The Fed has done the opposite, and seem so far to be getting the exact opposite result than they want.

Just sayin’.

Categories: Causes of Inflation, CPI, Federal Reserve, Monetarism, Tweet Summary, Uncategorized Tags: core cpi, core inflation, CPI, Fed, interest rates

Is Inflation Mean-Reverting?

February 28, 2023 Michael Ashton 2 comments

Over the last couple of decades, the assumption that inflation is mean-reverting to something approximating the Fed’s target level (or to where inflation expectations are supposedly – without any evidence advanced to support the notion – ‘anchored’) has become a key component of most economists’ models. I’ve pointed out a number of times in podcasts (including my own Inflation Guy Podcast as well as numerous others) and in articles that after a quarter-century of having low and stable inflation any model which did not assume mean-reversion has been discarded because it made bad predictions over that period compared to one which did.

A critical follow-up question is whether a model should assume mean reversion in inflation. My observation implicitly says that it should not. If I’m wrong, and inflation in fact is mean-reverting, then the right models won and there’s no real problem.

So, did the right models win?

There are many sophisticated ways to test for mean reversion, but an intuitive one is this: for a given current level of inflation, which is a better guess: (a) inflation will be closer to the ‘mean’ in the next period; (b) inflation will be about the same distance from the mean (homeostasis), neither pulling towards the mean nor pushing away from the mean; or (c) inflation will be further away from the mean, such that deviations from mean get amplified over time. In case (b) we would say that inflation itself has momentum; in case (c) we would say the acceleration of inflation has momentum. The latter case seems an unlikely case of extreme instability: it says that once prices move away from equilibrium, the economy either enters into an inflationary spiral or a deflationary spiral with no clear end. While this clearly can eventually happen in the hyperinflation case, those cases seem to have other causes that tend to amplify the swings (notably, an accelerating loss of faith in the currency itself).

Let’s consider case (a) and (b), and look at some historical data.

The chart below shows the period 1957-2022. The x-axis indicates the current level of inflation, (I collapse the range from -0.5% to +0.5% and call it 0%, +0.5% to +1.5% and call it 1%, etc), and the y-axis shows the average inflation over the subsequent one year. So, the point that is at [2%, 2.3%] shows that between 1957 and 2022, if inflation was between 1.5% and 2.5% then the average inflation over the ensuing 12 months was 2.3%.

I’ve drawn a line that indicates inflation at the same level at the point of observation and subsequently (x=y). Notice that for any number below x=2%, y tends towards 2%. This shows that when the current reading is very low inflation or deflation, the subsequent year we tend to get something close to 2%. Notice that at higher rates of inflation, the dots are below the line – meaning that if inflation is high, the following year tends to see inflation closer to the target. So, this is what we would think mean reversion would look like (and FWIW, it is more pronounced if you choose a longer historical period but because the next chart I am showing is core CPI and we only have data to 1957, I wanted to use the same range).

Case closed! Inflation mean reverts!

Well, not exactly. This is headline inflation. We already know that food and energy tend to mean-revert; that is, after all, why economists exclude food and energy – because we know that high energy readings lead to high inflation prints, and we don’t want monetary policy to overreact to inflation that isn’t really persistent. So, let’s look at core instead.

This chart looks different in key aspects. Except for very high core readings (with comparatively few observations that happen to coincide with when Volcker was aggressively tightening policy), the best estimate for core inflation over the next 12 months is not something closer to the assumed mean; the best estimate is the same level as what we have right now.

What that means – and it is super important – is that inflation has momentum. Keep in mind that during most of the period shown here, the Federal Reserve was actively trying to make inflation mean-revert. And they didn’t succeed, at least on a one-year basis.

Well, monetary policy works with long and variable lags, right? How about core inflation over the period 12-24 months from now? Surely then we should see some mean reversion?

The answer, at least for core inflation, is decidedly no…except for very high current readings of inflation.

Two takeaways:

Inflation has momentum. This means that forecasting core inflation to return to the target level, just because we think it should, is a bad forecasting approach.
Monetary policy seems to have had, at least over this period, very little effect. Generously, it didn’t have effect on average…so perhaps sometimes the Fed overshot and other times it didn’t do enough. There is indeed a range. For example: starting from 5% y/y core inflation (between 4.5% and 5.5%), the 10^th percentile of the 1y CPI outcomes after that was 3.5% and the 90^th percentile was 6.0%. Starting from 7%, the 10^th percentile was 3.1% and the 90^th was 9.6%. So the average includes some times when inflation kept going up and some times when it was going back down.

The corollary to the second takeaway…call it takeaway 2a…is this: by the same token, there’s not a lot of reason for the Fed to be super aggressive raising rates to rein in inflation. We know that they can do harm. It’s less clear that they can do a whole lot of good!

Categories: CPI, Economics Tags: core cpi, core inflation, economy, Fed, inflation

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